Abitibi Royalties offers another way to play Canadian Malartic

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By: Anthony Vaccaro2014-04-30

Not everyone is sitting on the piles of cash that Agnico Eagle Mines (TSX: AEM; NYSE: AEM), Yamana Gold (TSX: YRI; NYSE: AUY) are contemplating spending to acquire Osisko Mining’s (TSX: OSK; US-OTC: OSKFF) Canadian Malartic — but there are other ways for them to access the project’s gold.

Abitibi Royalties (TSXV: RZZ; US-OTC: ATBYF) is holding a royalty and a free-carried interest on parts of the property. Chad Williams, one of the company’s directors, told a luncheon crowd in Toronto on April 16 that “we will start generating cash flows this quarter . . . even as recently as a month ago, that wasn’t apparent.”

Abitibi Royalties was spun out of Golden Valley Mines (TSXV: GZZ; US-OTC: GLVMF) in 2010 by a board frustrated with the low value markets were assigning to the royalty, and worried that they could lose it in a hostile takeover.

But now the longer-term value of the royalty and free-carried interest is becoming more tangible. The reason is simple: under threat from Goldcorp’s now-abandoned hostile takeover bid, Osisko became more open about its mine plan to show investors it was on top of the project, and attract a higher bid.

Abitibi’s CEO Glenn Mullan says Osisko answered questions that he had been asking Osisko management for years — and he likes the answers.

It is now more apparent that Abitibi’s two key assets — a 2% net smelter return royalty on the Gouldie and Charlie zones and a 30% free-carried interest on a suite of deposits and prospective zones east of the Canadian Malartic deposit — are front and centre to Osisko’s medium and long-term plans.

The 2% net smelter return royalty is on the Gouldie deposit, which is south of the main Malartic deposit. Osisko has already begun mining Gouldie, which means Abitibi is generating the cash flows that Williams alluded to.

Things get even more interesting farther east from the Canadian Malartic deposit, where Abitibi holds a 30% free-carried interest on the CHL joint venture.

CHL’s major asset is the Barnat — or Mammoth — deposit which has 2.12 million tonnes in proven and probable reserves grading 0.97 gram gold for 66,450 oz., and measured and indicated resources of 1.9 million tonnes grading 0.79 gram gold for 48,000 oz. gold.

But Barnat is one part of the CHL story. The area also is home to the Jeffrey zone, which has proven and probable reserves of 4.7 million tonnes grading 0.68 gram gold for 103,260 oz., and a measured and indicated resource of 4.7 million tonnes grading 0.61 gram gold for 94,500 oz. gold.

Osisko plans to mine Gouldie and Jeffrey alongside Canadian Malartic over the next five years. While mining at Canadian Malartic would carry on until 2023, the end of production for Gouldie and Jeffrey would be mitigated by production at the Barnat Expansion at the end of 2016, which could last until 2027.

The Barnat expansion sits 3 km from the mill, and Osisko is building a road to connect the two, at its own cost.

It’s a lot of gold for a small junior to hold in its project pipeline, especially when those amounts have been outlined while Osisko focuses on proving up and getting the Canadian Malartic deposit into optimum production levels. As Osisko turns its attention eastward to prove up more ounces, Abitibi shareholders could rack up more gains.

Abitibi holds what Williams refers to as a “true” free-carried interest, as it will only have to pay for its 30% share of operating costs once the ore is fed into the mill.

“I’ve rarely seen a true free carry, and this is one,” Williams says. “So the math really works in our favour.”

On April 23 Osisko released results from the first drill intersection at the Odyssey North target. The hole was drilled 700 metres east of the Jeffrey zone along the Cadillac–Larder Lake fault, 4.5 km from the Canadian Malartic mill complex.

The highlight intercept came out of the Odyssey North zone and returned 110.2 metres (70 metres true width) grading 2.85 grams gold at a 1,150-metre depth.

The big hit happened 290 metres below a historic hole that assayed 1.83 grams gold over 51.8 metres. It was also 130 metres below and 140 metres east of another historic hole that cut 2.12 grams gold over 70.1 metres.

Odyssey has two zones — North Odyssey and South Odyssey — located at vertical depths of 400 to 1,000 metres on the north and south margins of a 200- to 300-metre-wide, south-dipping porphyry intrusion that the company says is similar to the Canadian Malartic porphyry.

Taking into account data from the latest drilling and the historic hole, the company says the mineralized zone could be a tabular body dipping 70 degrees south, with a 20- to 70-metre true average width.

One of the other two highlight holes intersected a 0.5-metre-wide, visible gold-bearing sheared gabbro beyond the north porphyry contact and assayed 105 grams gold over 1 metre. Osisko says the gold-bearing shear is part of a discovery, but it doesn’t know the zone’s size.

A third hole cut the South Odyssey zone, with the first intersection of 3.3 metres at 10.9 grams gold coming above the porphyry in a sheared gabbro zone.

All other intersections were within partly silicified grey porphyry, with sporadic mineralization distribution within an irregularly shaped body of unknown orientation.

Osisko has four drills probing the Odyssey zones, as it looks to define the size and geometry of both zones to vertical depths of 1.3 km.

While the drill results barely affected Osisko shares — they were up 2%, or 16¢, to $7.89 per share on April 23 — they had a big impact on the share price of Abitibi Royalties and Golden Valley Mines.

Abitibi’s stock shot up 50% to $1.50 on 28,700 shares traded on April 23 — their highest level since January 2012 — while Golden Valley, which holds a 63% stake in Abitibi Royalties, saw its shares go up 35%, or 3.5¢ to 13.5¢, on 1.45 million shares traded.

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